Coronavirus Update: March 31, 2020 | Trust Point
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Coronavirus Update: March 31, 2020

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Updated March 31, 2020

Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.

Things have changed dramatically in just one month.

Just a month or so ago, the world economy was generally healthy, equity indices were close to all-time highs, and terms like COVID-19, personal-protective equipment, and “social distancing” were not really in our vocabulary. Now we are experiencing a massive economic shock, equity markets are down more than 20%, and a new set of words are in daily use.

What happened?

It started with minor disruptions to global supply chains as China became the first to battle the coronavirus. COVID-19 quickly extended its reach across the globe, disrupting the travel, leisure, and hospitality industries. The inability of most countries to act quickly and decisively (like China and South Korea did) left many struggling with overwhelmed healthcare systems and only one real option: urgent containment. Social-distancing measures, both voluntary and government-imposed, have now left entire industries slowed to a crawl or, worse, shut down completely.

The near-term cost to economic growth has been drastic. The question is, how sustainable is the shutdown? Most experts suggest that we may be several weeks away from seeing concrete results from the containment measures. That is a long time for an economy to be compressed. A blanket restriction on the movement of people and commerce is simply not compatible with a properly functioning economy and can lead to many unforeseen problems.

Can the cure become worse than the problem?

The authorities face very difficult decisions ahead. “Hot spots” around the world have embraced full lockdowns, fearful that their hospitals could be overrun. This is understandable. However, what happens once a city or a region has the problem under control? Take New York City, for example. Once New York beats back the coronavirus, does it then close its “borders” and not allow anyone in? Travelers could bring in new cases to start the disease ball rolling again. Uncoordinated “rolling “lockdowns” will not produce the desired outcomes. Our hope is that states that haven’t yet fully embraced stay-at-home policies and the closing of non-essential businesses do so shortly. That way, a better balance between health and economic growth will be achieved more rapidly.

Monetary and fiscal stimulus to the rescue.

In the meantime, monetary and fiscal stimulus will have to bridge the gap. While not a cure, both can help in a number of ways. By preventing solvent businesses from going bust, by allowing the banking and credit markets to stay functional, and by providing some extra cash for people and businesses in need, stimulus measures can help mitigate the near-term economic fallout. In the U.S., both monetary and fiscal policy responses have been extremely fast and broad in scope.

The real cure will come, eventually, from the medical field. In the longer-term, a vaccine (more than 20 are currently in development) will become available to prevent new infections. However, this probably is at least 12 months away. In the shorter-term, therapeutics will be brought to market to reduce the severity of CV-19 and/or the length of time a patient requires hospitalization. Some treatments are being tested in clinical trials right now and have shown encouraging results. If proven successful, these treatments will allow the healthcare system to breathe easier and also allow a better balance between health and economic growth going forward.

So where does that lead us?

Nobody knows what the ultimate outcome will be. From a market perspective, however, we do have a set of historical precedents to look at. We know that equity market declines of 20%+ are not uncommon during recessionary periods. We remain patient but attentive to catalysts indicating any upcoming bright spots because we know that sharp market declines have always been followed by sharp market rallies (see chart).

For long-term investors, we remain convinced that the coronavirus, horrible as it may be, is presenting the best buying opportunities since the credit crisis of 2008-09.

Trough Graph 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Trust Point

We are proud of Trust Point’s century of service reputation of excellence. But, our approach and purpose has always been focused on the future. Not just our own company’s future - but, more importantly, our client’s futures.